Your borrowing capacity is the key to unlocking your homeownership dreams. It’s the amount of money a lender is willing to loan you based on various factors such as your credit score, income, debts, and financial records.
Know Your Credit Score: Your credit score plays a significant role in determining your borrowing capacity. Keep track of your score and understand what impacts it positively and negatively. You can easily access your credit report from companies like Experian, Illion, and Equifax. Your Brisbane Home Loans Mortgage Specialist is a great resource if you have questions on what you can do to improve your score.
Financial Records: Ensure your financial records are in top shape. Have all necessary documentation ready, especially if you’re self-employed. Lenders will want to see proof of income such as income statement and most recent two payslips. If you are self-employed, you will need the most recent two years financials for your business. If you are keen to get started, click here for a full list of required documents so you have everything you need when we chat.
Trim Expenses: Take a closer look at your expenses and trim unnecessary costs. Demonstrating financial responsibility by tightening your budget can impress lenders and increase your borrowing capacity. Speaking of budgets, they are the single most important tool to show you where any leakage is and where you can save more. Get in touch and we will be glad to share our excel spreadsheet with all the formulas and help you to get started. (Call to action)
Boost Your Income: Consider ways to increase your income, such as asking for a pay rise, upskilling, or pursuing side gigs. Every extra dollar counts towards increasing your borrowing power. Keep in mind that most lenders will not count second income unless you have been consistently in the role for 12 months or more.
Reduce Debt: Pay down high-interest debts like credit cards and personal loans as quickly as possible. This not only improves your credit report but also enhances your borrowing capacity. Did you know that the lender will add the limit of your credit card to your liabilities, not the balance. For example, if you have a limit of $20,000 with only $2,000 outstanding, the entire $20,000 will be counted as a liability. Pay down debt and reduce limits on credit and store cards.
Consolidate Debts: Consolidating multiple debts into a single loan can simplify your finances, reduce interest rates, and improve your borrowing capacity.
Manage Credit Cards: Keep your credit card usage in check. High credit limits or multiple cards can signal potential debt to lenders. Consider reducing limits or cutting back on cards to free up borrowing capacity.
Understanding Your Borrowing Capacity
Your borrowing capacity isn’t set in stone. It varies depending on your circumstances and the lender you approach. Here’s what you need to know:
Different Lenders, Different Offers: Not all lenders offer the same borrowing amount. Seek advice from finance experts to find the best fit for your needs.
Online Calculators vs. Expert Advice: While online calculators provide estimates, consulting a Brisbane Home Loans expert gives you a more accurate picture.
Income Is Key: Your income is crucial in determining your borrowing capacity. Higher income means a greater capacity to repay loans.
Savings and Equity Matter: Savings and equity increase your borrowing capacity by demonstrating financial stability and reducing risk for lenders.
Reduce Existing Debt: Lower your existing debt before applying for a loan to increase your borrowing capacity.
Consider Fees: Remember to account for fees and charges, which may slightly reduce your borrowing capacity.
Navigating Different Types of Debt
Various types of debt can impact your borrowing capacity differently:
Car Loans: Secured car loans can affect borrowing capacity, but fully paid-off loans can strengthen your application.
Personal Loans: Personal loan debt reduces available income for a home loan and may lower borrowing capacity.
Credit Cards: Responsible credit card usage improves credit ratings, but high limits may signal risk to lenders.
Buy Now, Pay Later: Using these services responsibly won’t harm your application, but heavy reliance may raise concerns.
Student Debt: While not a major concern, HELP debt can affect borrowing power by increasing the debt-to-income ratio.
Existing Mortgage: Existing mortgages must be considered, but tapping into equity or investment property income can bolster borrowing capacity.
Conclusion
Understanding your borrowing capacity is important when applying for a home loan. By implementing strategies to boost your financial profile and managing different types of debt wisely, you can increase your borrowing power and move closer to your dream home. At Brisbane Home Loans, our finance managers are here to help you every step of the way. Contact us today and take the first step towards homeownership!
